Watchdog probing 21 split-cap firms

Tuesday 21 October 2003 16:46 BST

THE City watchdog today said it had extended its investigation into allegations of collusion between split capital investment trusts to cover 21 different firms.

Appearing before the Treasury Select Committee, John Tiner, chief executive of the Financial Services Authority, said the inquiry had grown to be a 'very large investigation', from when he had last appeared before the committee and said the firms being looked at could be counted on the fingers of both hands.

He said: 'We saw this (investigation) as starting small and getting bigger. There are now 21 firms included in the collusion investigation.'

He said there were 60 FSA staff working on it, and they had 12-and-a-half years worth of taped telephoned conversations to listen to, thousands and thousands of pages of documents to read and 70 individual interviews.

He said there were three strands to the investigation looking at mis-selling, financial promotions and alleged collusions between different trusts.

Split capital investment trusts have different classes of shareholders, with some investing for income and some investing for growth. Investors lost millions of pounds when a number of funds collapsed due to stock market falls, high levels of borrowing to invest and high cross-holdings in other trusts.

The FSA is investigating whether managers in different funds colluded to buy each other's shares in order to support their price and create an impression of demand.

Asked by MPs when the investigation would be completed,Tiner said: 'We're absolutely doing everything we can, we are going at it as fast as we possibly can.'

MPs also challenged the FSA on whether it was picking up on all cases of market abuse.

FSA chairman Callum McCarthy said: 'I do not believe we are able, or any organisation is able, to pick up every single instance. But we do think we have improved and increased our market surveillance.'

Tiner added that there were currently around 13 or 14 cases of market abuse reaching an advanced stage of investigation.

McCarthy, who took over as chairman last month, was asked how he felt about Sir Andrew Large, a member of the FSA's board and Deputy Governor of the Bank of England, being investigated by the Office of Fair Trading for operating a cartel on public school fees.

He replied that Sir Andrew was a member of the FSA board as a result of being Deputy Governor at the Bank of England.

Committee members expressed concern that a new suite of stakeholder-style products would not have sufficient safeguards to protect consumers.

The products have been designed to be simple and low cost so that people can buy them without having to take financial advice in a bid to encourage those on modest incomes to save.

McCarthy said the FSA was looking at whether there was a form of regulation that would enable simpler and cheaper advice to be given to consumers buying the products.

He said if there was not, the FSA would oppose their introduction.

The committee was also critical of the FSA for not doing more to stop precipice bonds, a high risk investment, being sold to people through direct mailings.

Tiner said: 'We wouldn't say it was an inappropriate way to sell products to the public. They have a choice on whether they take advice or buy direct. We do not pre-vet adverts. The core of our regime is the responsibility of managers to act properly. If they don't we take action.'

But he added that the FSA was currently investigating 10 firms in relation to the sale of the bonds.

The watchdog defended its record when it was accused of increasing red tape for businesses. McCarthy said the FSA looked very carefully at the cost of regulation but it accounted for only around 1.6% of operating costs of the companies it regulated.

However, he added that it did plan to reduce the number of consultation papers it produced next year.